Using the New Patent ETF (OTP) to Mix Growth With Value

Roger Nusbaum submits: The other day I mentioned having a sit down with the designer of the index that will underlie the Patent ETF -- its proper name is the Claymore Ocean Tomo Patent 300 Index Fund (OTP). By the way I think there is a Polish bank by that name.

A couple of thoughts: I think the thing here is the secondary effect. Its history is that it has a 92% correlation to the S&P 500, but averages 300 basis points of outperformance studied over ten years. The focus is on patents, so it occurred to me that chances are not too many financial companies have patents. Turns out that is right. I was told there is only one financial stock in the fund. If you look at where SPX gets its yield, it makes sense that OTP will yield less than S&P 500 Index (SPY). So better price appreciation (per my conversation) but less yield (per my thought process).

It seems to me that OTP will be a proxy for larger cap growth. The person I met with might disagree on the growth part, and obviously I could be wrong, but the lack of financial exposure makes me think it will tilt to growth. Pairing OTP with one of the dividend ETFs could be a viable alternative to holding SPY. I have no idea if this combo would work as a better performing alternative to SPY or not, but that isn't the point.

The concept here is that the dividend ETFs that are heavy in financials obviously yield more than SPY and probably tilt to value because of the financial weighting. Some new ETFs will have a useful secondary effect. You can't know about this if you shun every new product that comes along.

Comments

[András Somi:]

Great comment, exciting thougths, there's only one misleading point: the OTP Bank is Hungarian (but it has also subsidiaries in Bulgaria, Slovakia, Romania, Serbia and Crotia too).

But this fact has nothing to do with the article, I know :)

Greetings,
András Somi
(Budapest, Hungary)

2007 Jan 04 09:09 AM